Anyone who starts an IRA early, in their teens or 20’s, will see it grow to huge amounts by retirement. But young people often don’t have the funds to put into an IRA in the early years. The solution? If you have the means, help your grandchildren put money into an IRA as soon as they start working their first part-time job, or as soon as you can. What do I mean? If you have the means, give each grandchild with a job (they have to have income to do an IRA) $5500 with the stipulation that they put it into a Roth IRA. Even if you only do this for a few years, it will make a HUGE difference in their retirement later.

2. Use your IRA for charitable giving

Do you plan to leave money to a charity or church at your death? If so, use IRA funds to do it. If you leave the IRA to charity, there will be no tax on the IRA because the charity is tax exempt. Uncle Sam will be out of luck. How do you do this? Name a charity on your IRA beneficiary designation or consider using a donor advised fund at the Community Foundation for the Land of Lincoln (to direct funds to the charities you choose).

3. Explode your wealth with those unwanted RMD’s

Once you are age 70, you have to take out a minimum amount (RMD) from your traditional IRA each year. What do you plan to do with that money? Do you need it? If not, what about using it to create more wealth for your family? One option is to buy a life insurance policy using your RMD every year to pay the premium. The benefits? More money at death, plus the life insurance death benefit is income tax free! (Unlike the IRA that has a built-in tax bill for your family.)

4. Again, consider your grandchildren (and children)

Why not leave some (or all) of your IRA to your grandchildren? Worried about skipping your children? What about getting life insurance to make up the difference? The result? Save income taxes, bless the grandkids, and leave your kids tax-free life insurance funds (instead of an IRA with a tax bill).

If your family will stretch the IRA, the biggest bang is to use the Roth IRA. Convert the IRA now to a Roth, avoid the RMD’s during your life, then give your family tax free distributions for years or decades. Poor Uncle Sam will be left out! (But remember to consult your tax advisor regarding the timing and amount of those Roth conversions.)

When it comes to your IRA, there are some planning traps you need to look out for…

Here are 7 IRA planning problems to consider:

1. Incorrect beneficiaries – This is very basic, but often overlooked. Confirm that the beneficiaries are set up correctly. If you lack a beneficiary, then the account will go to your estate, limiting your “stretch” to as little as 5 years. Have you named the wrong beneficiaries or are you missing someone (like a new grandchild)? If you have named a trust as the beneficiary, was that done as part of a detailed plan with an attorney experienced in IRA trust planning?

2. A “blow out” instead of a “stretch out” – Remember, a big goal of IRA planning is to pay the taxes later by doing a “stretch” IRA. This means that we want your child to be able to take out the IRA over their life expectancy. But many kids don’t do it. In fact, the vast majority of kids take out the entire IRA within a couple years of death. Why do kids take it out (and pay the taxes now)? Here are a few reasons:

They wrongly think they can roll it into their own IRA (so they take it all out, triggering tax, then it’s too late to put back in).

They cash out a Roth IRA because it’s tax free, not realizing they are missing out on years of tax free growth in the future.

3. Not getting good advice – Many families have cashed out retirement funds or annuities and are later surprised by a big tax bill. Good advice from your attorney and tax advisor after death will help the family understand the options.

4. Not considering younger generations – Do you like your grandkids? Well, what about saving tax while helping out your grandchildren? The younger the beneficiary of your IRA, the longer the stretch and the bigger the tax savings. You might consider giving your IRA’s (or part of them) to your grandchildren.

5. Naming grandchildren as direct beneficiaries – What if someone took our advice about younger generations and decided to name grandchildren as IRA beneficiaries? That’s good, right? Well, yes, but there could also be problems. If you name a minor child as beneficiary, the IRA company may require a court guardianship before the grandchild can benefit from the IRA. Then, at age 18, the grandchild gets control of the IRA, regardless of the remaining amount. (And we all know what happens when 18-year-olds inherit large sums of money.)

6. Not considering a trust to hold IRA funds after death – Many people incorrectly think that leaving an IRA to a trust will trigger tax on the entire IRA. But this is not true. IRA funds and trusts require special expertise and planning, but a properly drafted trust can hold an IRA and still benefit from the stretch out. And using a trust can help avoid the “blow out” mentioned in #2, while protecting the money from young heirs, future divorces or other unforeseen risks.

7. Not converting to a Roth IRA – Converting to a Roth IRA means you pay taxes now and then future growth of the IRA is tax free. If you don’t need the money, and you can afford to pay the taxes, converting to a Roth may give your family more money later. Let’s ay you convert to a Roth at age 70. A Roth IRA has no RMD (required minimum distributions) so if you live to be age 95, you will have had 25 years of tax free growth that you can leave to the family. And the kids (or grankids) can have another 30-50+ years of tax-free growth if they “stretch” the Roth IRA. Converting to a Roth IRA is a great tool, but please consult your tax advisor first. Make you know how much tax will be owed before you move funds to the Roth IRA.

Many of our clients have retirement accounts, such as an IRA, 401(k) or a 403(b). These accounts take careful planning. Why? Because the accounts typically have never been taxed, and how you plan for them will determine how and when your family will have to pay the taxes on them. That planning often involves the SECOND BEST time to pay taxes.

You may be wondering at this point, “when is THE BEST time to pay your taxes?” Well that would be NEVER, right? If you can avoid taxes altogether, that would be great. But if you can’t avoid it altogether, then the next best time is…

LATER. Not today, but at some later date. Maybe in a few months, or a few years, or a few decades. This is one situation where it pays to procrastinate because the money continues to grow while you wait. (And in many cases you’re waiting years or decades.) So, the longer we put off paying the tax, the better off we are. On the other hand, if your family has to pay the tax immediately after your death, that is the worst case scenario. Good planning will help your family avoid that worst case scenario. Good planning will help your family avoid that worst case scenario and pay the IRA taxes LATER instead of immediately.

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IRA planning can be tricky. In order to make sure you plan as best as you can, you should discuss the following questions with your attorney and other advisors:

1. Will you need the IRA funds during your life? If not, you may want to convert to a Roth or use the RMD’s to purchase life insurance to grow the wealth going to your family.

2. Will your heirs need it shortly after your death? If so, then the stretch out is not relevant.

3. Are you doing any charitable giving? If so, use the IRA to do it, if possible. That way the contribution is tax free.

4. Do you want to protect what you are leaving to family from their future divorces, lawsuits, creditors, poor judgment, wild spending, etc.? If so, you need protective trusts for each of your heirs. An IRA can go to a properly set up trust and still get the “stretch out”.

5. Are you facing estate tax at your death? If so, you need careful planning to avoid a double tax. An IRA subject to both estate tax and income tax can sometimes lose 75% or more to taxes!

6. Are you in a 2nd marriage? His kids and her kids? If so, be careful leaving your IRA to your spouse. You want to balance out your wishes for your kids with your desire to provide for your spouse. You can’t assume you can leave the IRA to your spouse who will later leave it to your kids. First, it may be spent and gone. Second, your spouse has every legal right to change the beneficiary after your death (to his/her own children).

7. Is your IRA (or other tax deferred retirement plan) a large percentage of your total estate? If so, then even more is at risk. You need careful planning, and it’s vitally important you consult with a professional.

Effective IRA planning is very important in effective estate planning. Give us a call today at 217-726-9200 if you have any questions, or check out one of our upcoming workshops to find out more about effective planning.

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Many people incorrectly assume that all their assets will be distributed through their will. Unfortunately, this is a big misconception. A good example of this is retirement savings, such as an IRA or 401(k). These accounts are passed on to the person or persons who were designated on the form when the account was started. Many people don’t give much thought to these forms, especially after they first fill them out, but that can cause huge problems down the road. (Read about how such a mistake cost the adult children of Leonard Smith $400,000.)

Just recently, here at Edwards Group, we had this sort of situation arise as well. A client had an old 401(k) from a previous job in which his parents were named as beneficiaries. Unfortunately, they had passed away so the 401(k) had no beneficiaries listed. When the client died, we had to go through the expensive process of probate court to get the 401(k) into the hands of the right people.

Improper beneficiary designations can also jeopardize nursing home care if Medicaid is paying for that care. Recently we had a case where the spouse of someone in nursing care died leaving money to the disabled spouse instead of their adult children. This large amount of money is now jeopardizing the surviving spouse’s benefits.

I cannot emphasize enough how important these beneficiary designations are!It is not enough to just fill out the form once and then leave them be. It is vitally important that you check these designations yearly as a part of the regular upkeep of your plan. (Download our Beneficiary Designations form here.)

So, what types of assets with beneficiary designations trump a Will?

Life insurance polices

Annuities

Retirement accounts such as 401 (k)s and IRAs

Bank accounts with a payable on death provision

Investment accounts with a transfer on death provision

And what kind of life changes should trigger a review of beneficiary designations? After the following life changes, you need to double check who you put on your beneficiary designation forms:

Marriage

Divorce

Births

Deaths

Job changes, including retirement

Long-term care needs of one spouse

Disability of a child or grandchild

Now, here’s what to do to make sure this doesn’t make a mess for you or your family:

Make a list of all retirement accounts, life insurance policies, annuities and investment accounts. To the right of those specific assets, write who the beneficiary is and the date you last designated them. Review this list once a year (like on April 15). Or join the Dynasty program where we help you keep up with all of this. We’ve also included a PDF you can download to help make the process easier.

This whole issue highlights why Laura and Liis are so important to the clients at Edwards Group. Many of you may wonder why we need two Asset Coordinators, but it is a big job and it is a critically important job. One of the biggest mistakes people (and even other attorneys) make is not properly handling assets within an estate plan. You cannot have an effective plan if the assets have not been properly titled, designated and coordinated.

As always, if you have any questions about beneficiary designations or any other estate planning or elder law issues, please call us at 217-726-9200. We will be happy to speak with you and answer any questions we can.

Do you want to make things easier on your family? Or more difficult? Good planning will spare your family stress, conflict, and expense later. I will never forget this article from Today.com by reporter Sharon Epperson where she talked about her father passing away and what his planning meant for her and her sisters, “By making some important decisions while living, my father helped to lessen the overwhelming stress of coping with [his] sudden loss.”

Sadly, loved ones left behind bear the burden of lack of planning.

So, what happens when you die without an effective plan or even a will?

In the US courts, if someone dies without a will it is called intestate, which basically means the state will decide what to do with any assets. There will be a lot of paperwork, court appearances, etc.

One of the most difficult things is making a list of all assets and debts. Since these types of things are not typically discussed freely, this can be a real headache for your loved ones left behind. During a time of grief they have to play detective trying to hunt down what you may own or owe.

There are also many assets that aren’t determined by a will. For these type of assets your loved ones will have to gather the necessary paperwork to prove whom the beneficiary or new owner is. Assets that aren’t passed down by will are:

Life insurance proceeds

Jointly owned assets, such as real estate or bank accounts

Property held in a living trust

Funds in IRAs, 401(k)s, or other retirement accounts

Payable-on-death bank accounts

Residential real estate with a “Transfer on Death Instrument” recorded with the county

We know there are a lot of reasons people don’t plan. Tarina says a lot people admit (after planning) that they were really intimidated by the process or didn’t feel they knew Dave well enough, but none of them regret finally taking the leap and planning. At Edwards Group we’ve worked really hard to make the process as painless and effective as possible. We also offer a money-back guarantee. Now, what attorney do you know of who does that?

If you’re ready to stop gambling on what will transpire if the unthinkable happens, here are the next steps to take:

1) Our free, no pressure workshops are a great way to learn more about the planning needs your family may have. They are also a great way to get to know our firm better.

2) If, after attending a workshop, you would like to take the next step, you will receive $200 off your initial meeting fee, and you can read more about that process here.

3) Not ready to talk to a person yet? We have put a lot of our time into developing a website that contains helpful information about all aspects of planning. You’ll find hundreds of articles about estate planning, trust, Veterans benefits, Medicaid and Medicare on our website. Feel free to use the search button to quickly get to what you need.

No matter what, I hope that you will take the time to learn about ways to protect your family and your assets. The other side of our practice involves helping people who didn’t plan properly clean up the mess that’s left behind. My sincere desire would be for every family to have effective planning strategies in place and for no family to have go through the consequences of bad planning. Take a step in the right direction today by attending a workshop, giving us a call at 217-726-9200, or signing up for our weekly email newsletter.

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